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Cell Phone Subsidies: R.I.P.?

T-Mobile USA CEO John Legere stopped cold any more speculation about his company getting the iPhone when he confirmed T-Mobile had indeed made a deal with Apple (NASDAQ: AAPL) to offer the iPhone next year.

But the real blockbuster was Legere letting loose this bit of industry-moving news at T-Mobile's parent company Deutsche Telekom's Capital Markets Day in Bonn: Customers should forget about getting any more subsidized handsets from the U.S.'s fourth-largest carrier. Either pay full price up front, make regular payments for the phone, or bring your unlocked device.

What would a T-Mobile subscriber get in return for paying the full retail price of $649 for an unlocked 16 GB Phone 5? A no-contract, unlimited talk, text, and data plan for $70 a month. That's the same plan at AT&T (NYSE: T) offers costing $120 per month, according to T-Mobile.

But, there are caveats subscribers should understand if they decide to bring their own phones to T-Mobile's network.

First, only unlocked GSM iPhones will work. That leaves out those older model iPhones bought from Verizon (NYSE: VZ) and Sprint Nextel (NYSE: S) -- the iPhone 5, however, would work.

And second, if that GSM phone is a 3G phone that does not support the 1700Mhz band, it will only operate at 2G (EDGE) speeds on the T-Mobile network, just like the very first iPhone.

No contract, really?But one aspect of the T-Mobile no-contract, unsubsidized plan looks a lot like a long-term contract plan. Legere's twist on the no-contract concept is to sell an iPhone to a customer for only $99, but then to add on $15 to $20 to the monthly bill for 20 months. Obviously, some form of a contract would be involved here.

The part of such a scheme that just might be brilliant is the customer being locked in for a long period of time without the carrier footing the subsidy bill. Apple gets its price, the customer can afford an expensive phone, the carrier has a locked-in customer, and all without undercutting the operating margin with a subsidy!

If T-Mobile's angle works, and it just may when it can finally offer true 3G and 4G LTE speeds to entice more customers, it may be something that the other carriers will try to emulate. The handset subsidy problem affects all carriers.

Apple's iPhone is always the elephant in the room when it comes to the outsize influence it has over smartphone subsidies. Despite that, however, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Comments from our Foolish Readers

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Yeah, right: it's "the same difference". If people are too dumb to see that this non-subsidy is still a subsidy, then we have a very serious problem with our understanding of money. Probably self-fulfilling.

Subsidized two-year contract where the costumer pay $200 for the phone up front and $90 for unlimited talk, text and data.

Proposed:

Rent-to-own contract where the customer pays $99 for the phone up front, $15-20 each month for the cost of the phone and $70 for unlimited talk, text and data.

So instead of T-Mobile having to pay the $449 remainder up front to Apple and receives $90 each month from the customer, T-Mobile has to pay a $550 remainder up front to Apple and receives $85-90 each month from the customer.

Unless I'm missing something really obvious (which certainly happens, I could definitely be missing something obvious), that seems worse for T-Mobile's margins. Technically they aren't undercutting their margins with a subsidy. But they seem to be undercutting their margins even more with a rent-to-own contract.

This is technically what I have with Softbank in Japan. But like Softbank (and the other Japanese carriers), this proposed T-Mobile scenario seems to be structured in such a way that it is pretty much indistinguishable from an normal subsidized phone contract. I am paying for my iPhone 5 each month for two years until I pay off the remainder of the balance (as stipulated in my contract with them). But for my wallet, there is little difference between this and my old AT&T subsidized iPhone.

And though I'm technically paying for my iPhone each month, I'm not actually paying for my Softbank iPhone 5 each month. As long as I remain with them for two years, they automatically rebate the monthly cost of the phone each month. So I technically pay for the phone each month, but they give me back that exact same amount each month (and by give, I mean they never charge me that cost in the first place). But that's another off-topic matter unrelated to T-Mobile.

I think it's great they are offering the iphone next year. It seems only fitting. The funny thing is I still have my little flip phone I've had for quite a while. My friend was recommending I check out this site: http://storelocator.bell.ca/bellca/en/AB/Calgary/Bell-Westbr..., what do you think? I really want to get the best deal.